Employees must know what they are earning and how it is related to performance
No individual should expect to be called a high performer in isolation
The new workforce is eager, forward-looking, inquisitive – and perpetually shopping around. Hence reward managers would do well to take a leaf out of their Marketing colleagues’ book to market or sell reward policies
The new decade is one down, with nine to go. And considering India’s quicker recovery from the downturn, it’s indeed a Happy New Decade! The Human Resources fraternity, and their leadership teams, are busy working long hours to meet the April deadline when they can finally convey positive news to their employees.
The Indian market is buoyant again. Consequently, compensation trends are finally looking positive too.
Hay Group’s General Market report for October 2010 forecasts overall merit increases in 2011 at 12 %. Employees should indeed feel pleased – and high performers, even more so.
The litmus test for the coming decade is whether this optimistic state of affairs will be sustainable. I believe that by making some resolutions and sticking by them, there is no reason why we can’t enjoy more years of growth. Here are nine to get the ball rolling:
1. Communicate, communicate, communicate
We cannot overstate the importance of communication. Employees must know what they are earning and how it is related to performance. The return on reward investment depends on how well employees understand their reward packages well enough to put in the discretionary effort that makes the difference between break-even and profitability.
The new workforce is eager, forward-looking, inquisitive – and perpetually shopping around. Hence reward managers would do well to take a leaf out of their Marketing colleagues’ book to market, or sell, reward policies. Treat reward like a product portfolio, and employees as customers.
2. Make Reward transparent
As reward policies become sharper and scorecards become tighter, employees will need to be kept constantly educated on what they are earning in totality. Not just what they take home or what they can make if they worked harder. Hence the need to make transparent to employees, their overall package in a user friendly, customized statement.
Enter: the Total Reward Statement.
While this is a traditional approach wrapped in paper and intranet sites, in the next decade, Reward managers should be able to say: There’s an app for that! Real-time, and available 24x7 on a mobile device. Now, how cool is that!
3. Total Reward – the Market Benchmark
According to Hay Group’s General Marketing Remuneration report (April 2010), a significant number of companies use base pay as the basis of their remuneration policy. An equal number uses Total Remuneration, which includes base pay, total allowances, cost of benefits, short-term variable pay and long term incentives. However, it must be kept in mind that Base pay as the basis of the remuneration policy puts pressure on the overall wage bill – year on year. At the same time, companies may be investing in benefits and rewards that employees may not consider useful.
Presenting the concept of Total Reward to the employee may at first generate some amount of resistance or cynicism but eventually employees would begin to appreciate it once the benefits become apparent. Hence, it is important to declare everything the company is investing in to ensure that employees come to work with a smile!
Going forward there will emerge a standardized approach on how compensation is defined. Such that the entire reward investment will be apparent to everyone – internally as well as relative to the market. An approach that would consider both the tangible and intangible elements of Reward – Total Reward.
4. Paying for performance
Pay for Performance: This should be a no-brainer, provided the concept of ‘performance’, in definition and design and measurement, has been buttoned down. Reward managers should now foster a performance culture where reward is aligned to metrics that drive profit and revenue growth. And this should reflect in the scorecard.Also, goals around revenue growth and profitability should read: Company, Unit, and then, Individual – in that order.
The overall success of a company playing a strong role in the measurement of individual performance should be a given – a part of the next decade’s culture. No individual should expect to be called a high performer in isolation.
5. Variable Pay – where the rubber meets the road
Variable pay should take its place in the sun – finally! Traditionally, actual variable pay as a share of the total cost to company has ranged between 3% and 16% across levels and across sectors, averaging at a meagre 9% (Hay Group’s General Market Remuneration Report, October 2010). This needs to go up significantly with a larger percentage of ‘at risk’ pay in the overall package. While this is likely to happen – and increase – at senior levels, it needs to be brought into the reward culture across the enterprise as a whole.
As reward managers plan for the April salary review, they should consider allocating a larger percentage of the increase into the variable pay component. Consequently, basic salary – the component that drives retirals and the total cost to company – should receive a lower allocation. This would reduce the overall wage bill and mitigate risk in the event of either troubled times – or low performance.
Also, as hiring is once again gathering momentum, it is a good opportunity to start a clean slate with the new incoming talent. New compensation packages should be constructed with a significantly higher variable pay component. This would ensure that the new population comes in with the mindset that they have to perform to earn.
6. Motivating the middle order
Of course, it is necessary to focus on top performers and develop innovative ways to retain them, and to prepare high potentials for their next step upwards. However, the reality is that a majority of the workforce falls in-between the high performers/potentials and the low performers. These are the solid, average performers. The “Century club” – steadily coming in at a 100%. They are competent, have been trained and consistently ensure the smooth running of the organization by just meeting goals set for them. It is important to consider this critical constituency in the overall reward strategy because if they are not kept engaged and motivated, there is a greater chance of them regressing than performing better.
Hence scorecards and incentive plans should cater to the needs and aspirations of the middle order giving them the comfort that (a) they are doing a good job and their contribution is appreciated, and that (b) if they perform better, they can earn a greater reward
7. HR as strategic partner to the business
HR would continue to be the custodian of People practices and ensure that they look ahead, in line with the growth plans of the company. Yet not allow reward practices to regress to costly stereotypes of the past for which a high price has been paid.
In order to achieve this, HR managers would need to enhance their understanding of the company and its goals right from the planning stage. Reciprocally, business managers too would take on a People hat and become evangelists for reward policies.
8. Centralization of Reward policy
In the attempt to reduce costs, many companies took steps to centralize reward policies. Some went even further to centralize reward decisions and even administration.
Hay Group’s research indicates that for a global reward strategy to be successfully implemented, it is necessary for it to be more than a mission statement, yet should specify areas that are non-negotiable. Local market reward leaders should be consulted on any global philosophy to ensure that it does not clash with market practices, culture or regulations which may make it either non-compliant or less competitive. Local reward managers should be able to translate the global strategy into locally implementable action plans as well as educate employees on the rationale. Finally, consistently measure and test employee satisfaction with the policies.
9. Reward begins at home – first
With exponential growth comes the need for a strong leadership. The tendency is to look for leadership from outside because there is the belief that finding leaders from within is difficult. An expensive belief!
By no means should it be construed that hiring talent from outside is a bad idea. The point is that developing talent from the inside is a much better proposition.
In conclusion, the next decade will be all about performance, and reward will revolve around this. Employee engagement, communication and market referencing will become important and necessary facilitators for reward design and implementation and would attract higher investments in time and money.
The reward environment in the coming decade will be aggressive, focused and result oriented – much like the next generation workforce entering the market. Challenging, yet rewarding, times ahead!
(Sources: Hay Group Market Remuneration Report; Hay Group report on the Changing Face of Reward global study, 2010)
Oscar De Mello, Country Head – Reward Information Services, Hay Group